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III. Department of Commerce Information on the Individual
Validated Licensing System
The Individual Validated License (IVL) is at the heart
of the licensing process. Even though more foreign sales
of U.S. firms occur under some form of bulk license (See
Chapter II), the IVL application procedures and regulations
are the major competitive factor of the whole control
system. It is the boundary conditions established between
licensed and nonlicensed and between IVL and bulk licenses
that are especially critical in determining competitive
problems with the system. It is, for many firms, the
procedure which creates the greatest difficulties. Much
of the public perceptions related to operation of U.S.
export controls are based on information related to the ILL
administrative process. Therefore, understanding the
parameters related to the operation of the IVL license
process are important.
This chapter focuses especially on measures of
processing time to show how uncertainty from the point of
view of the firm is created. This uncertainty due to
processing time variances affects the ability of a firm to
be a reliable supplier. Another aspect of the system is
the level of technology that the process is covering. What
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is shown is that a large portion of the license load is
very low tech, low sensitivity items. The system shows
little systematic relationship between processing time and
level of criticality of the item or technology specified in
the license. Another conclusion which will be developed in
this and later chapters is that the statistics routinely
reported on the IVL administrative process are misleading
with respect to how the system is influencing U.S.
competitiveness.
The Department of Commerce processes in excess of
120,000 Individual Validated License applications annually.
Table lO provides summary data on the number of cases
handled by the DOC quarterly between 84.3-86.1, the dollar
value, the dollar value of denied license applications, and
the percent of cases Returned Without Action (RWA). The
number of cases closed each quarter averages very close to
30,OOO with a quarterly value of $17 to $20 billion.
Some of these reported operating parameters must be
carefully interpreted. This is true with respect to dollar
value of coverage, rate of denial, average processing
times, or rate of RWA. As indicted earlier, for example,
firms probably request on average up to twice the value of
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products they actually ship. Another example is the rate
of license applications denied, which averages about 1
percent of the total value of applications. This would
seem to indicate the system is not very restrictive. But,
as will be discussed in subsequent parts of this report,
this rate of denial does not reflect the real degree to
which U.S.-based firms are seeing the constraints of the
license system bind on their international operations.35
Table 11 shows the 10 largest Commodity Control List
(CCL) categories for approved applications for manufactures
ranked by value for FY85. Just these 10 categories
accounted for 92 percent of all IVL license approvals
(related to manufactured items), by value, in FY85.
Ranking the CCLs by occurrence shows a similar high degree
of concentration; six of the largest categories ranked by
value also appear on this list. (See Table 12.) The
degree of concentration indicates the extent to which the
35This statement is not intended to infer either in a
positive or in a negative way on the value of the
constraints. The point is that the degree of
restrictiveness cannot be directly gauged by the percent of
licenses denied nor the associated dollar value. This
point is discussed further in Chapter V.
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controls tend to be focused on a relatively few number of
industrial categories.36
Just as the license system tends to focus on a
relatively limited set of industrial categories, the system
also only applies to a subset of U.S.-based enterprises.
In FY85, approximately 250 firms filed 50 license
applications or more, with the total applications for these
250 firms being about one-third of the total of all
applications for IVLs received by the Department of
Commerce.37 In value terms, the top 164 firms had
applications totalling $34 billion out of a total of about
$64 billion. Information collected from U.S. firms,
combined with the Commerce information, suggests that
somewhere between 2,000 and 3,000 firms are actively
applying for licenses each year.38 It is important to note
that over time a larger number of U.S. firms actually
36The mapping between CCL categories and Standard
Industrial Classifications (SIC) is not that strong. For
example, a commodity may fall into CCL Number 1565 only
because it contains a microprocessor. But after sampling
firms that use the licensing system, it became clear the
ranking of CCL occurrences are reasonably indicative of
where the focus of the controls falls on U.S. industry.
37These firms filed approximately 33,000 applications.
38Some of these are foreign capitalized firms.
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interact with the licensing process because some firms drop
out as others enter.
Thus, if one looks only at the statistics on CCL
occurrences and only the estimated number of U.S.-based
firms that are actively involved annually in the licensing
system from the U.S. perspective, one would conclude the
system is relatively concentrated. It does not fall
broadly across all industries, nor does it affect all U.S.-
based firms.
. l,
A slightly different perspective on the extent of
influence of the system is obtained by noting the number of
foreign enterprises (distributors, affiliates, unaffiliated
firms) that interact with the U.S. export licensing system.
Commerce data on foreign distributors, affiliates, and end-
users, indicates that 100,000 to 200,000 foreign
enterprises have some degree of interaction with the U.S.
licensing system. The fact that the number of foreign
enterprises involved with the U.S. licensing system is over
30 times the number of U.S.-based firms begins to indicate
the broad reach of the system abroad and why any
competitive disadvantages created by it can ripple outward
over a large number of enterprises.
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Processing time for IVL license applications and
associated uncertainty over it is frequently cited by firms
as one of the major problems they have with the export
control system.39 This is the next issue to be examined.
The average processing times for various types of cases and
destinations reported by the Department of Commerce for
most of the first quarter of 1986 are shown in Table 13.
Processing time varies significantly by country of
destination and whether the case is referred within the
U.S. government from DOC to other agencies for review.
Applications for exports to COCOM, not requiring referral,
take an average of 14 days, while applications involving
the People's Republic of China were taking an average of
156 days.40 Records for average processing times for
earlier periods indicate they have not varied significantly
in the past four quarters.41 While the average processing
time is 27 days, the distribution is very skewed--with 74
39See response to NAS Questionnaire, Appendix C, for
example or the American Electronics Association
Questionnaire, Appendix D.
40PRC case handling times have probably declined since
this profile was prepared. The point regarding variation
of processing times is still valid because applications for
Bloc destinations and certain West, non-COCOM countries can
have very high average processing times.
41For example, in FYi985, the average processing time
for all cases was 26, 28, 30, 28 days respectively. In
1986.1, it was 27 days.
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percent of the cases requiring less than `25 days to process
and approximately 5 percent of the cases extending beyond
100 days. Figure 7 shows the distribution of processing
times for licenses approved in April 1986.42 The
processing times reported by DOC (defined in this report as
DOC Processing Time) cover the time from entry into the
Commerce Department system until license issuance (but not
receipt of license by the exporter).
There is a second way to measure processing time--
from the viewpoint of the firm applying for a license.
This definition of license processing time includes the
time from when the firm initiates its filing for a license,
plus DOC's pre-screening time, as well as the DOC
processing time plus any time related to an application
being returned without action and refiled.43 Thus, it is a
better measure of the distribution of processing times for
license approvals as seen by the firm because it covers the
total time, except for the time required to send the
approved license back to the firm. This second definition
we called Total Processing Time. For the cases approved in
42See Appendix A for a description of the sample used
to make the estimate.
43See Appendix A for further discussion of the
definition and the sources of the data.
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April 1986, the average Total Processing Time was 54 days
with one-third of all cases requiring more than 30 days of
Total Processing Time. This contrasts to the DOC reported
average processing time of 25 days. Figure 8 displays the
distribution of processing times using this definition.
Figure 9 compares the distribution of processing times
for the two definitions. Note that the right-hand tails of
the two distributions--the portion greater than 30 days--
are significantly different. This is partly due to the
inclusion of RWA times in the Total Processing Time
definition. Since RWAs occur frequently (overall about one
in six cases are RWAd), this is a better measure of the
total duration of processing as seen by the firm. Figure
10 compares the two definitions of processing times again,
this time on a cumulative basis. Note that over 80 percent
of the cases under the DOC definition fall under 30 days,
whereas only half of the cases do under the Total
Processing Time definition.
The sample of approvals was be divided up by
destination, whether it was a West-West or East-West
(including the PRC) transaction. Figure 11 compares the
distribution of Total Processing Times for the different
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destinations. Licenses for East-West transactions have a
very different distribution, with over half taking in
excess of 50 days versus 15 percent of the West-West cases
taking more than 50 days. If the PRO cases are dropped
from the sample, the Bloc case processing times are seen to
fall predominately in the 30 to 100 range, whereas West-
West cases fall predominately in the 20 to 50 day range.
(See Figure 12.)
What these figures indicate is that while reported
average processing times are under 30 days, the
distributions of processing times independent o f
destination have fairly wide dispersions. This creates
uncertainty for firms using the system.
Average processing times were also calculated for
applications filed by small firms and large firms. The
hypothesis was that small firms might experience greater
difficulty with the system due to their inability to cope
with its complexity and therefore longer processing times
on average would result.
Using the DOC definition of processing time, the
hypothesis is not borne out. Large firms obtained 85
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percent of their approvals in under 30 days while small
firms received 80 percent of their approvals in under 30
days. But a significant difference is revealed when the
alternative definition for processing time is used (i.e.,
Total Processing Time) and further if destination is also
taken into account. (See Tables 14 and 15.) Table 14 is
again based on the DOC Processing Time definition; Table 15
uses the Total Processing Time definition. Using the Total
Process Time definition shown in Table 15, small firms
experience an average 14 percent longer time for
processing. But a further difference is revealed if
processing times are calculated for West-West versus East-
West destinations.44 The DOC definition (Table 14) still
shows no difference for West-West, but reveals that smaller
firms' approvals for East-West destinations are taking 22
percent longer. There is also a marked difference in the
number of East-West approvals processed under 40 days. For
large firms, it was 72 percent, while for small firms, it
was 40 percent. This is an indication that, at least for
licenses for East-West trade, small firms do seem to have a
greater difficulty with the license system.
44Note: for the purposes of these comparisons,
applications for the PRC were included in the East-West
category.
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The evidence regarding small firms is even more
supportive of the basic hypothesis if the Total Processing
Time criteria is used. (See Table 15.) In West-West
trade, small firms averaged 46 days processing time, while
large firms averaged 35 days.45 An interesting item to
note is that for East-West trade, large firms average 145
days versus 96 days for small firms. This was due to some
extremely long-lived 810c licenses appearing in the sample
for large firms. The distribution of processing times
(percent under 40 days) measure is more indicative. Almost
half of all large firm East-West licenses were approved
under 40 days versus only 13 percent of small firm
licenses. Thus, using Total Processing Time as the
measure, the hypothesis regarding small firms having
greater difficulty with the system seems supported by the
evidence.
There is a possibility that some of the firm effect is
due to small firms clustering in CCL categories that on
average have longer processing time. The data was
tabulated for four major CCL categories and then subdivided
45This difference is very consistent with the results
from the NAS Survey discussed in the next chapter.
Surveyed small firms reported an average processing time of
48 days versus 38 days for the larger firms.
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by firm size. (See Table 16.) For the electronic
computing category and the electronic device manufacturing
equipment category, with respect to West-West trade, the
results support the basic hypothesis. The sample sizes are
too small to arrive at any clear results with respect to
East-West trade. Further evidence is presented from data
collected in the NAS Survey in the next section. (See
Tables 21, 22, and 23.)
The next issue to be covered are licenses Returned
Without Action (RWA). In terms of work load in the license
processing system, RWAs are an important factor because
according to Department of Commerce information,
approximately one of every six cases processed by DOC each
quarter is RWAd.46 The RWA rate is a somewhat misleading
statistic, since some cases are RWAd a multiple number of
times, the actual proportion of licenses RWAd is less.
Still, the frequency of occurrence is still sufficiently
high to create an additional uncertainty in processing time
for an exporter.
46Note: the statistics reported in this chapter were
collected prior to a DOC change in its policy towards
handling a RWA case. This change would reduce the process
times and also reduce the frequency with which RWAs occur
in the system.
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The key parameters developed for a sample of 200 RWAs
taken from the total FY85 RWA case file are summarized in
Table 17. It was hypothesized that smaller firms would be
RWAd more frequently due to lack of familiarity with the
procedure associated with filing a license. While 58
percent of all RWAs occurred to licenses filed by small
firms, this is not statistically different from the overall
small company share of licenses filed. Another statistic
developed was that only 52 percent of the cases examined
were identified as resubmitted. This was considered to be
a low number. The low rate of resubmission could be an
aberration due to the way licenses were identified as
resubmitted. If not, it could indicate a high degree of
discouragement, that is, firms giving up because they
cannot overcome objections of some reviewing agency. It
also could reflect a phenomenon called "fishing" where
firms explore the boundary conditions with a trial license,
pulling it back before it gets denied. There is no way to
know which of these possible explanations is most likely.
The next category of license data analyzed relates to
reexport license applications. Reexport applications in
FY85 represented about 10 percent of the total DOC
licensing case load. The information in Table 18 reports
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various overall measures for reexport applications. The
number of applications nearly doubled between FY83 and
FYS5, while license applications, excluding reexport
applications, rose by about 88 percent. Approximately 81
percent of all reexport applications from COCOM countries
were from affiliates of U.S.-based parents. (See Table
19.) For the three Memorandum of Understanding (MOU)47
countries in our sample, slightly over half were from
affiliates of U.S.-based firms. One MOU country had an
especially small fraction of applications from U.S. firms
which pulled down the average for the three MOU countries
in our sample.
The last analysis of licensing data relates to the
level of military criticality of the items being covered by
validated licenses. The issue overall is to examine how
processing times for licenses vary with the level of
technology and the degree of diversion risk. A sample of
1,618 licenses was analyzed by Commerce Department license
officers who identified, independent of actual destination,
the level of military criticality of the item being
exported. These licenses represented approximately 50
47The Memorandum of Understanding is an Executive
Directive requiring Defense Department review of controlled
exports to 15 named countries.
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percent of the applications on which processing was
completed in the first week of June 1986. The sample is a
representative cross-section of all license applications.
Four levels of technology were specified: within
Administrative Exception Note 9 (ANN), within PRO Green
Zone, eligible for distribution license (DL), and above
eligibility for the distribution license. These step up in
degree of military criticality at each level. Appendix E
presents the results of this analysis. It is a complex
exercise to analyze and summarize.
To begin, an overview of the tables contained in
Appendix E is provided along with a discussion of their
organization. Next, some general observations and
conclusion based on the data are presented. The reader is
encouraged to carefully review the data further due to the
importance of this issue and the complexity of presentation
necessitated by the complexity of the license process
itself.
The total sample of 1,617 licenses48 had 1,506
approvals (a 93 percent rate), the balance mainly being
RWAs. (See Table E.1.) This is a lower proportion of RWAs
48See Appendix A for a discussion of the sample.
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and denials relative to the historically observed
percentages. The reason for the difference is believed to
be due to the Commerce Department's new policies designed
to minimize the number of cases being RWAd. This change
was instituted in the period just prior to the sample
period. It is highly likely the RWA rates in the sample
was influenced by the change. Table E.2A breaks the sample
down by a very basic set of criteria. For the five
destinations, the sample is allocated by whether the case
was within AEN limits, or within PRO Green Zone limits, or
required a DL, or was above the DL, in which case the term
"supercritical" is used to denote this. The supercritical
zone should be the most sensitive level of technology.49
Slightly over one-third of the sample was within AEN
limits, slightly under one-third met PRC Green Zone limits,
with 20 percent eligible for a Do, the supercritical
category accounted for 13 percent of the sample. The
average processing times increase with the sensitivity of
the destination, as expected, but it is important to note,
not with the level of criticality. (See Table E.2B.)
49Note these determinations were made for each case
independent of actual destination.
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A summary of average processing times for each
combination of destination and level of criticality is
presented in Table E.3. Tables E.2A, E.2B and E.3
summarize information presented in Tables E.5A-E.9B which
are detailed summaries prepared for each destination.
Table E.4 presents a summary of negative actions for the
different combinations of destination and level of
criticality.
The following general observations and conclusions are
based on reviewing Tables E.2A, E.2B, and E.3:
Free-worId destinations processing times
2.
~2
1. increase slightly with diversion risk (i.e., as
you read up a column in Table E.3 from COCOM to
Other-West to MOW);
do not vary with criticality level, (i.e., across
the rows for COCOM or Other-West or MOU ) except
for unilateral foreign policy cases;
do not vary as a function of unilateral versus
multilateral controls; and
are nearly SO percent longer for foreign policy
than for national security controls.
With respect to license actions
1. no AEN level cases were denied;
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Representative terms from entire chapter:
processing times
4-
the denial rate for "supercritical" items (>DL)
was 4/208 = 1.9 percent, compared to 3/1409 = 0.2
percent for lower level items (
